Abstract

http://ssrn.com/abstract=1787478
 
 

References (61)



 
 

Citations (7)



 


 



Bond Variance Risk Premiums


Philippe Mueller


London School of Economics & Political Science (LSE) - Department of Finance

Andrea Vedolin


London School of Economics and Political Science

Yu-Min Yen


Institute of Economics, Academia Sinica

September 27, 2013


Abstract:     
This paper studies variance risk premiums in the Treasury market. We introduce and price the generalized Treasury variance swap that takes into account stochastic interest rates, is robust to jumps and can be perfectly replicated by a static position in Treasury futures options and a dynamic position in the underlying sampled at the daily frequency. We document that shorting the variance swap yields positive returns with annualized Sharpe ratios around two that cannot be explained by standard risk factors. The term-structure of implied variances is downward sloping but increasing in tenors and its slope is strongly linked to economic activity.

Number of Pages in PDF File: 61

Keywords: Variance risk premium, Treasury implied volatility, Variance swap

JEL Classification: E43, G12

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Date posted: January 2, 2012 ; Last revised: September 28, 2013

Suggested Citation

Mueller, Philippe and Vedolin, Andrea and Yen, Yu-Min, Bond Variance Risk Premiums (September 27, 2013). Available at SSRN: http://ssrn.com/abstract=1787478 or http://dx.doi.org/10.2139/ssrn.1787478

Contact Information

Philippe Mueller (Contact Author)
London School of Economics & Political Science (LSE) - Department of Finance ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
Andrea Vedolin
London School of Economics and Political Science ( email )
Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
Yu-Min Yen
Institute of Economics, Academia Sinica ( email )
128 Academia Road, Section 2
Nankang
Taipei, 115
Taiwan
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